2025 (4) TMI 1202 - AT - Income Tax

Addition u/s 68 - unexplained capital and unexplained cash creditors - assessee failed to prove the identity and capacity of the depositors and the genuineness of the transaction with conclusive evidences - CIT(A) deleted addition - HELD THAT - All the evidences were confronted to the AO who CIT(A) noted did not dispute the veracity or the authenticity of the evidence and therefore on a holistic consideration of the issue CIT(A) deleted the addition made u/s 68. We have noted that the facts and circumstances relating to the impugned addition are identical to that in AY 2004-05 in the case of the assessee. DR has been unable to point out any distinction in facts or even on law on this aspect before us. We therefore concur with the assessee that the issue stands squarely covered by the order of the ITAT in the case of the assessee for AY 2004-05 following which we hold that the additions made u/s 68 pertaining to unexplained capital and pertaining to unexplained cash credits have been rightly deleted by the ld. CIT(A) after appreciating all evidences filed by the assessee. Addition made of unexplained investment in jewellery of 496 gms found at the residence of the assessee which was attributed as belonging to the maid servants of the assessee and the jewellery attributed as belonging to the family over and above that allowed by the AO - CIT(A) deleted addition - HELD THAT - CIT(A) has found the explanation to be plausible. We do not find any infirmity in this finding of the ld. CIT(A). We agree with the CIT(A) that it is not unusual for the ladies of the house to be generally aware of the status of the jewellery and being in the habit of safe keeping the jewellery of others and the men being generally unaware in respect of these matters. Also pertinent is the fact noted by the CIT(A) that the spouse of the assessee identified all the items of the jewellery belonging to the maid servants even at the time of search which was indicated from the relevant panchnama. In view of the same we see no reason to interfere in the order of the ld. CIT(A) treating the jewellery of 496 gms valued at Rs.2.57 lakhs as duly explained. The order of the ld. CIT(A) deleting the addition therefore of Rs.2.57 lakhs is confirmed. As for the deletion of part of addition of jewellery found in the locker amounting to Rs.2, 52, 824/-attributing it as belonging to the family in line with the Board s guidelines and judicial decisions in this regard considering the status community customs of the assessee/family. DR was unable to controvert the applicability of Board s guidelines and judicial decisions to the jewellery found in the locker to the tune of 574.3 gms. The order of CIT(A) therefore deleting the addition of unexplained jewellery found in the locker to the tune of Rs.2, 52, 824/- is therefore confirmed. Ground of Appeal No.3 of the Revenue is accordingly dismissed. Disallowance of interest for non business use of borrowed funds without considering the fact that borrowed funds were used for non business purposes - CIT(A) deleted addition - HELD THAT - The relevant portion of the order was pointed out to us wherein the ITAT had noted the fact of sufficiency of own funds for making the impugned advance and the proposition of law settled in this regard that no disallowance is called for where sufficient own interest free funds are available for making interest free advances as laid down in the case of CIT Vs. Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT DR was unable to distinguish the decision of the ITAT in AY 2004-05 both the facts and on law. In view of the same we concur with the ld. Counsel for the assessee that the issue stands squarely covered by the order of the ITAT in the assessee s own case for AY 2004-05 following which we hold that the disallowance made by the AO of interest expenses amounting to Rs.4, 48, 988/- has been rightly deleted by the CIT(A) after appreciating all evidences filed by the assessee. Undisclosed income from construction business of Sahjanand complex - proper profit on work in progress was not disclosed by the assessee particularly when the stock register for consumption of the material was not maintained - CIT(A) held that the AO was not justified in rejecting the audited books of accounts of the assessee since he had failed to point out specific deficiencies which were fatal in deducing the profits correctly - HELD THAT - We find that the ITAT noted the basis with the ld. CIT(A) for finding anomaly in the books of accounts of the assessee to be entirely baseless and confirmed the order of the ld. CIT(A) noting that not a single anomaly was noted by the AO in the financial figures reported. DR was unable to distinguish the decision of the ITAT in AY 2004-05 both the facts and on law and therefore the issue raised in Ground No. 5 by the Revenue stands covered by the order of the ITAT in AY 2004-05 following which we uphold the order of the ld. CIT(A) deleting the addition made by the Assessing Officer on account of undisclosed income from construction business of Sahjanand complex. Suppression of receipts - HELD THAT - Before the CIT(A) the assessee however demonstrated that the amounts were received from the members over a period of three years and even filed confirmation from some members with regard to the same. The ld. CIT(A) has gone through all these details and given a finding of fact that the assessee has in fact recorded more receipts as compared to that noted in the documents seized during survey. DR was unable to refute the factual finding of the CIT(A). We have no hesitation therefore in agreeing with the ld. CIT(A) that the Assessing Officer s findings of suppressed sales by the assessee to the tune of Rs.2.08 crores was based on incomplete appreciation of facts. The order of the ld. CIT(A) deleting the addition made is therefore upheld. Unexplained investment in purchase of land - entries recorded on seized document as well as the statement of Shri Vikas A. Shah who was one of the parties to the impugned transaction - CIT(A) deleted addition - CIT(A) deleted the addition noting that the Assessing Officer has made these additions based on statement of Shri Vikas Shah and documents found from him which were never confronted to the assessee - HELD THAT - DR has been unable to point out any distinction in facts or even on law on this aspect before us. We therefore concur with the assessee that the issue stands squarely covered by the order of the ITAT in the case of the assessee for AY 2004-05 following which we hold that the addition made by the Assessing Officer on account of unexplained investment in purchase of land from Shri Vikas Shah has been rightly deleted by the ld. CIT(A) after appreciating all evidences/submissions filed by the assessee. Ground No.7 raised by the Revenue is therefore found to be devoid of any merit and is accordingly dismissed. Unexplained investment - HELD THAT - We concur with the ld. Counsel for the assessee that the issue stands squarely covered by the order of the ITAT in the assessee s own case for AY 2004-05 following which we uphold the order of the ld. CIT(A) restricting the addition of Rs.17, 23, 126/- to Rs.14, 90, 312/- and Rs.8, 44, 032/- to Rs.5, 61, 655/- in respect of unexplained investment in Swaminarayan Residence and Hotel Nilkanth respectively. Accordingly ground raised by the Revenue is dismissed. Addition made on the basis of a seized document considering the entries on the document as well as the findings of the AO - CIT(A) deleted addition - HELD THAT - DR has been unable to controvert the fact noted by the ld. CIT(A) that the confirmation filed by Jasubhai who acknowledged the document as pertaining to him for work carried out in his flat by his society and having nothing to do with the assessee was not refuted by the AO in the remand report. In view of the same we see no reason to interfere in the order of the ld. CIT(A) deleting the addition made to the income of the assessee as there was nothing in the document attributing it to the assessee in any way and this fact was even confirmed by the party whose name found mentioned in the document i.e. Mr. Jesubhai Barot. AO having not refuted the contents of the confirmation filed by Mr. Jesubhai we are of the view that his challenge the deletion of addition made by the ld. CIT(A) is not sustainable. Ground of appeal No.9 raised by the Revenue is therefore dismissed. Anticipation of receipts in future - CIT(A) deleted addition - HELD THAT - With regard to amounts so found recorded in the books of the assessee the Revenue we find has no case with the Assessing Officer having accepted the fact that the same were duly recorded in the books of assessee by way of banking entries. With respect to the amount of Rs.25 lakhs it is not disputed that there was no description or narration of any sort against this figure while against the rest of the figures there were name mentioned of different enterprises of the assessee and name of persons to whom the amounts were attributed. Therefore the contention of the assessee was that this was a dumb figure accepted by the CIT(A) we hold is correct and his explanation thereof that the figure may have been noted in anticipation of receipts in future appears to be plausible. The order of the ld. CIT(A) therefore deleting the entire addition on account of notings is upheld. Suppressed of receipts of hotel business - HELD THAT - Document revealed data only for two months pertaining to the impugned year i.e. April and May 2004 and even for the sake of argument, though it has been found to be incorrect by the ld. CIT(A) the figures noted in the seized document are taken to be correct the Assessing Officer cannot resort to extrapolation of this data for the entire year in the absence of any material found during search pertaining to the rest of the months of the year. The addition in any case could have been made only with respect to the data found for the months in the document i.e. April and May 2004 the exercise of extrapolation of this data by the AO for the rest of the year in any case is not tenable. In view of same we uphold the order of the ld. CIT(A). Depreciation @ 25% on electrical installation and fittings installed in hotel buildings while the authorities below had held the applicable rate of depreciation on the same to be 15% - HELD THAT - DR was unable to distinguish the said decision before us. In view of the same we agree with the ld. Counsel for the assessee that the disallowance of depreciation on electrical installations and fittings in hotel buildings of the assessee by applying rate of 15% as against 25% applied by the assessee treating it as plant and machinery was contrary to law. The issue we agree with assessee is squarely covered in favour of the assessee by the Express Resorts Hotels Ltd. 2014 (12) TMI 1256 - GUJARAT HIGH COURT Disallowance made of depreciation is directed to be deleted. Addition made noting that the reference made to the DVO for valuation of the property was not in accordance with the law having been made without rejecting the books of accounts of the assessee - HELD THAT - DR was unable to point out any distinction either on facts or on law on the issue before us. In view of the same we agree with the assessee that the issue of addition made on account of unexplained investment in Swaminarayan Farm Residence and Hotel Neelkanth stands covered in favour of the assessee by the decision of the ITAT in the case of the assessee itself in the immediately preceding year i.e. AY 2004-05. The addition therefore is directed to be deleted. Unexplained investment in jewellery found from the locker and residence - HELD THAT - The explanation of the assessee with regard to this jewellery which was found in the locker of the assessee was that it was purchased from one Mahendra Co. sourced out of withdrawals reflected in the books of accounts. The Assessing Officer on inquiry made in this regard found that the said person was not in existence on the date of the supposed sale. CIT(A) based on this finding of the AO which remained uncontroverted confirmed the addition to the extent of Rs.5.99 lakhs. The assessee was unable to convince us in any manner about the genuineness of the alleged purchases made of the jewellery from Mahendra Co. He was unable to controvert the findings of the inquiry of the Assessing Officer that the said party was not in existence when the sale of the jewellery purportedly was made. In view of the same we see no reason to interfere in the order of the ld. CIT(A) confirming the addition of unexplained investment in jewellery. Undisclosed investment in valuables - HELD THAT - There were many items which were categorically found not disclosed in the books of the assessee. The fact situation therefore calls for addition to be made on account of unexplained investment in these assets and the CIT(A) has been fair enough in scaling down the valuation of the assets made by the AO and further giving the benefit of telescoping against the same. Assessee was unable to point out any perversity in the valuation attributed by the CIT(A) to these items at Rs.30 lakhs. The decision relied by the ld. Counsel for the assessee before us in the case of Balbir Singh Sekhon 2011 (9) TMI 1144 - ITAT CHANDIGARH we find is of no assistance since the findings of the ITAT of the said case was to the effect that where no reasons have been assigned to valuation of household expenses at higher amount the addition is not sustainable. In the present case however there are valid reasons for making addition on account of unexplained investment. The articles found at the residence of the assessee being far more than that recorded in the books of the assessee. Therefore in view of the above the addition confirmed by the ld. CIT(A) as undisclosed investment in valuables is therefore upheld. Sales proceeds of the godown sales not disclosed in the books of account - No infirmity in the order of the ld. CIT(A) holding that a nexus of the data contained in the document seized with the assessee was clearly established and as rightly pointed out by the ld. CIT(A) in the absence of any credible explanation given by the assessee for the said document there is no other recourse left but to confirm the addition made on account of the difference in the receipts as per the seized document and that reflected in the books of the assessee on account of sale of godowns. Non granting benefit of telescoping and not granting set off of alleged unaccounted income against alleged unexplained investment in various assets found during the course of search proceedings - Assessing Officer is directed to grant the benefit of telescoping of the unaccounted income of the assessee against unaccounted investment in various assets as possible on facts and in law.

Summary

The core legal questions considered in this judgment revolve around the validity and correctness of various additions and deletions made to the income of the assessee under the Income-tax Act, 1961, particularly in the context of search and seizure proceedings under section 132, assessment proceedings under sections 143(2), 68, 69B, 69C, and 145(3), and the admissibility of additional evidence under Rule 46A. The issues include:

1. Whether the Commissioner of Income-tax (Appeals) erred in admitting additional evidence under Rule 46A without satisfying the conditions prescribed.

2. The correctness of deletions of additions made under section 68 on account of unexplained capital and cash credits, considering the identity, capacity, and genuineness of transactions.

3. The validity of deletion of additions on account of unexplained jewellery found during search, including the attribution of jewellery to maid servants and family members.

4. The propriety of deletion of disallowance of interest expenses claimed on borrowed funds alleged to be used for non-business purposes.

5. The correctness of deletion of additions on account of undisclosed income from construction business and valuation of work-in-progress (WIP).

6. The validity of deletion of additions based on impounded books and documents reflecting undisclosed receipts not recorded in regular books.

7. The correctness of deletion of additions on account of unexplained investment in land purchases based on seized documents and statements.

8. The legality of restricting additions based on valuation reports of the District Valuation Officer (DVO) without giving opportunity to be heard and without rejecting books of accounts.

9. The correctness of deletion of additions based on seized documents relating to extra work and other receipts.

10. The propriety of deletion or confirmation of additions relating to unexplained investments in household goods, luxuries, and jewellery, including the principle of telescoping.

11. The correctness of disallowance or allowance of depreciation rates on electrical installations and fittings in hotel buildings.

12. The entitlement to telescoping of unaccounted income against unexplained investments.

Issue-wise Detailed Analysis:

1. Admissibility of Additional Evidence under Rule 46A

The legal framework requires that additional evidence can be admitted only if conditions under Rule 46A are satisfied. The Revenue challenged the admission of voluminous additional evidence by the CIT(A), contending that conditions were not met. The Court referred to the ITAT's earlier decision for AY 2004-05, which upheld the CIT(A)'s admission of evidence after considering the difficulties faced by the assessee in producing evidence relating to cash creditors and capital introduced in various partnership concerns over seven assessment years. The Court noted that the CIT(A) sought the Assessing Officer's report on the additional evidence, ensuring procedural fairness. The Revenue failed to distinguish the facts or law from the earlier decision.

Conclusion: The Court upheld the admission of additional evidence in the interest of justice, dismissing the Revenue's ground.

2. Deletions of Additions under Section 68 on Unexplained Capital and Cash Credits

The Assessing Officer made additions totaling approximately Rs.7.95 crores on account of unexplained capital introduced and cash credits in various proprietorship concerns. The assessee filed voluminous evidence including bank statements showing capital introduced through banking channels from personal accounts. The CIT(A) admitted and appreciated this evidence, and the Assessing Officer did not dispute its authenticity in remand reports. The ITAT in AY 2004-05 had similarly upheld deletion of such additions after appreciating evidence. The Revenue could not distinguish the present facts from earlier decisions.

Conclusion: The deletions of additions under section 68 were upheld as the assessee satisfactorily proved the identity, capacity, and genuineness of the transactions.

3. Deletion of Additions on Account of Jewellery Found During Search

During search, jewellery was found at the residence and locker of the assessee. The Assessing Officer treated jewellery valued at Rs.8.52 lakhs and Rs.2.57 lakhs as unexplained due to non-explanation of source and contradictory statements by the assessee and spouse. The CIT(A) applied Board's guidelines and judicial precedents, attributing reasonable quantities of jewellery to family members and maid servants. The CIT(A) found the contradictory stand plausible, noting that husbands may not be fully aware of wives' jewellery and safekeeping habits. The Revenue challenged this acceptance.

The Court found no infirmity in the CIT(A)'s reasoning, emphasizing the plausibility of explanations and the identification of jewellery by the spouse during search. The addition of Rs.5.99 lakhs relating to jewellery allegedly purchased from a non-existent party was confirmed.

Conclusion: The deletion of additions for jewellery explained as belonging to family and maids was upheld; unexplained jewellery additions were confirmed.

4. Disallowance of Interest Expenses on Borrowed Funds

The Assessing Officer disallowed Rs.4.48 lakhs of interest expenses, alleging borrowed funds were used for non-business purposes. The assessee had interest-free advances in proprietorship concerns and sufficient own funds. The ITAT in AY 2004-05 had held that where sufficient own interest-free funds are available, no disallowance is warranted (relying on Apex Court precedent in CIT vs. Reliance Industries Ltd.). The Revenue could not distinguish this precedent.

Conclusion: The deletion of disallowance of interest expenses was upheld.

5. Deletion of Additions on Undisclosed Income from Construction Business

The Assessing Officer rejected the books of Sahjanand Enterprise and estimated profits at 8% on WIP, making additions of Rs.19.86 lakhs. The CIT(A) and ITAT in AY 2004-05 found no anomaly in books and held that rejection without specific deficiencies was unjustified. The estimation was not in accordance with law.

Conclusion: The deletion of additions on undisclosed income from construction business was upheld.

6. Deletion of Additions Based on Impounded Books Reflecting Undisclosed Receipts

Documents seized during survey showed receipts not recorded in assessee's books totaling Rs.2.08 crores. The assessee demonstrated that payments were received over three years and were recorded in subsequent years' books, supported by confirmations from members. The CIT(A) found Assessing Officer's addition based on incomplete appreciation of facts and deleted it. The Revenue failed to refute this factual finding.

Conclusion: The deletion of addition based on impounded documents was upheld.

7. Deletion of Additions on Unexplained Investment in Land Purchases

Additions of Rs.84.50 lakhs were made based on statements and documents seized from a third party. The CIT(A) deleted the addition noting that statements and documents were not confronted to the assessee, and the credibility of the third party was doubtful. No nexus was established between the assessee and the transactions. The ITAT in AY 2004-05 had similarly deleted such additions.

Conclusion: The deletion of additions on unexplained land investment was upheld.

8. Restriction of Additions Based on DVO Valuation Reports

Additions of Rs.17.23 lakhs and Rs.8.44 lakhs were made based on DVO reports without rejecting the books of accounts. The CIT(A) restricted these additions applying deductions for self-supervision and local rate variations. The Court relied on the Apex Court decision in Sargam Cinema that reference to DVO without rejecting books is illegal. The ITAT and High Court had confirmed this in a related case.

Conclusion: The restriction of additions and deletion of excess additions based on invalid DVO reference was upheld.

9. Deletion of Additions Based on Seized Documents Relating to Extra Work and Other Receipts

Several additions based on seized documents relating to extra work, estimates, and receipts were deleted by the CIT(A) after considering explanations, confirmations from parties, and lack of evidence disproving the assessee's claims. The Assessing Officer's additions were based on surmises and conjectures without adequate inquiry.

Conclusion: The deletions of these additions were upheld.

10. Additions Relating to Unexplained Investments in Household Goods, Luxuries, and Jewellery and Telescoping

The Assessing Officer made additions of Rs.25 lakhs on household goods and luxuries, and unexplained jewellery investments. The CIT(A) gave telescoping benefit of Rs.9.33 lakhs, reducing unexplained investment to Rs.7.67 lakhs. The Court upheld this approach, noting that the Assessing Officer himself found withdrawals used for personal luxuries and furniture. The principle that one asset cannot explain another was not violated as the telescoping was applied to avoid double addition.

Conclusion: The confirmation of additions with telescoping benefit was upheld.

11. Disallowance of Depreciation on Electrical Installations and Fittings

The Assessing Officer disallowed excess depreciation claimed at 25%, applying 15% rate. The Court relied on the jurisdictional High Court decision holding that electrical installations and fittings in hotels qualify as plant and machinery and are entitled to 25% depreciation.

Conclusion: The disallowance of excess depreciation was directed to be deleted.

12. Entitlement to Telescoping of Unaccounted Income Against Unexplained Investments

The assessee sought benefit of telescoping unaccounted income against unexplained investment. The Court found merit in this contention and directed the Assessing Officer to grant such benefit as per facts and law.

Conclusion: The ground seeking telescoping benefit was allowed.

Significant Holdings:

"We completely agree with the ld.CIT(A) that in the interest of justice, this additional evidence needed to be admitted, since the evidences went to the root of the matter to establish the case of the assessee."

"Since the assessee duly filed evidence to prove the same, which were admitted by the ld.CIT(A) and examined by the AO, and no infirmity pointed out in the evidence, we have no hesitation in concurring with the ld.CIT(A) that the source of capital introduced in various proprietorship concerns of the assessee stood duly explained."

"It is not unusual that the husband is not usually aware and updated with the everchanging status of the wife's jewellery and her habit of safekeeping jewellery of others is a plausible explanation."

"No disallowance is called for where sufficient own interest free funds are available for making interest free advances."

"Rejection of books of accounts without pointing out specific deficiencies which were fatal in deducing profits correctly is not justified."

"Reference to the District Valuation Officer without rejecting books of accounts is illegal and not in accordance with law."

"Addition made on surmises and conjectures without adequate inquiry is not sustainable."

"Telescoping benefit of unexplained expenditure in jewellery with that of unexplained expenditure in household goods is justified where withdrawals from capital account were used for personal expenditures and luxuries."

"Electrical installations and fittings even if installed in a hotel building would be regarded as plant and entitled to depreciation at 25%."

"The Assessing Officer is directed to grant the benefit of telescoping of the unaccounted income of the assessee against unaccounted investment in various assets as possible on facts and in law."

Final determinations included dismissal of all Revenue appeals challenging deletions made by the CIT(A), and partial allowance of the assessee's appeal deleting disallowance of depreciation and granting telescoping benefits, while confirming some additions relating to unexplained jewellery and unexplained payments supported by seized documents and unrefuted findings. The Court consistently applied precedents, statutory provisions, and principles of natural justice, emphasizing evidentiary requirements and the need for Assessing Officers to make additions only on cogent material and after proper inquiry.